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Brexit: FAQs for insurance companies

Here you will find answers to questions frequently asked by insurers on the United Kingdom’s departure from the EU.

(1) How would BaFin assess Solvency II internal models previously approved by the Prudential Regulatory Authority (PRA)?

Insurance companies which already have an approval for an internal model in the UK may need a new approval for the internal model from BaFin in Germany if the German branch is transformed into a subsidiary or a new company is established and does not intend to calculate its solvency capital requirements using the standard formula.

Supervisory law provides for a period of six months for the approval process. This may be preceded by a pre-application phase. The processes and embedding of the risk model in the risk management system must be examined in each case. However, it might be possible to accelerate the approval process by taking account of relevant PRA evaluations and documentation about the methods used in internal models previously approved by the PRA.

Under certain circumstances, approval may be granted subject to ancillary conditions. In such cases, companies can provide evidence that all approval requirements are fully complied with at a later date.

(2) What are the general requirements regarding outsourcing to the UK?

Since the UK’s departure from the European Union (EU), it is no longer a member state or EEA signatory state within the meaning of section 7 no. 22 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), but rather a third country within the meaning of section 7 no. 6 of the VAG. As of 1 January 2021, the provisions under supervisory law applicable to the EU and the EEA therefore no longer apply in or with regard to the UK.

All typical functions or activities of insurance business which undertakings outsource fall within the scope of the supervisory authorities’ outsourcing monitoring. Undertakings can make wide use of this option, provided that they carry out a corresponding risk analysis, among other things.

If an insurance undertaking domiciled in Germany outsources large parts of its functions or activities to a service provider in the UK or – for example if a German insurance undertaking is newly established in the context of Brexit – to a parent undertaking in the UK, this could be permissible under supervisory law as long as a control framework is guaranteed which is acceptable from a supervisory point of view. It must be ensured that BaFin, as the competent supervisory authority, has effective rights to exert influence and monitor and can thus supervise the service provider in question, having access to information and, where necessary, access to the business premises of the service provider for this purpose. The insurance undertaking must make sure that the service provider's local supervisory authority or national provisions do not restrict access to, in particular, information regarding the outsourced functions and insurance activities or to the service provider's business premises.

In accordance with section 47 no. 8 of the VAG, the intention to outsource an important function or insurance activity must be notified to the supervisory authority.

Furthermore, any conditions regarding outsourcing stipulated by the supervisory authorities in the UK must be observed. Insurance undertakings that plan to outsource activities or functions must therefore consult the UK supervisory authorities.

(3) Is there a requirement for members of the management board (or other persons who effectively run the undertaking) of an insurance undertaking authorised in Germany to have their principal residence (or a residence at all) in Germany?

There is no specific supervisory provision stating that all management board members or other persons who effectively run the undertaking have to have a residence in Germany. Rather, the decisive factor is whether those persons can ensure that business operations are conducted properly in line with supervisory requirements. However, BaFin will not support the establishment of "letterbox insurers", so a substantial proportion of management, in particular, should be resident in Germany. The details of this would have to be clarified in the possible supervisory authorisation process.

(4) Can Solvency II requirements be met in full via reinsurance with a parent undertaking domiciled in a third country?

In principle, BaFin does not object to substantial reinsurance to another group insurance undertaking with registered office outside the EU, provided that the proposed reinsurance stands up to supervisory scrutiny, particularly with a view to risk management aspects. However, the supervisory authority takes the view that a 100% reinsurance of the risks written by the German insurer is problematic. In principle, the German insurer should therefore have a significant retention (as a rule 10%) of its insurance business. However, here, too, the details would have to be clarified in the possible supervisory authorisation process.

Reinsurers domiciled in third countries must nevertheless comply with the statutory requirements for conducting reinsurance business in Germany. Unless an exception under section 67 (1) sentence 2 of the VAG applies, reinsurance business conducted by a third country reinsurance undertaking is therefore subject to an authorisation requirement. Since the exceptions specified under section 67 (1) sentence 2 of the VAG do not apply to reinsurance undertakings domiciled in the UK, such undertakings require authorisation from the supervisory authority in order to write new business in Germany. A further exception applies in the area of insurance by correspondence. This is detailed in the interpretative decision on some aspects regarding the conduct of reinsurance business in Germany by insurance undertakings situated in a third country.

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